Hedge
Funds:
Transparency
Transparency Needs
Position: Investors and regulators need more transparency from the hedge fund sector.
Rationale: Information about a hedge fund’s strategies with regard to investing, leverage, and investment vehicles will help investors understand the risks inherent in specific funds.
Where stated: USAC - SEC Hedge Fund Registration (PDF); CMPC - FSA DP 05/4 Hedge Funds (PDF)
Investor Reports
Position: Complete and accurate reporting is a necessary cost of seeking capital from others.
Rationale: Hedge funds, like other entities seeking capital from investors, have an obligation to provide financial and operating information and to make their records available for periodic regulatory review.
Where stated: USAC - SEC Hedge Fund Registration (PDF)
Aggregation of Short Interest Data
Position: Short interest data should be aggregated by subject-company and prime broker.
Rationale: This type of aggregation is meaningful to investors. Aggregation by subject-company is relevant to investors because it provides insights into the perspectives of others in the market on the specific security. Aggregation by prime broker is particularly valuable for regulators to enable them to recognize which regulated firms are enabling hedge fund activities and whether those regulated firms are subjecting their shareowners and the markets to systemic risks. Aggregation that is not warranted or useful is that which is based on the depositary involved or the investor who is selling short. Disclosure of the former would have little benefit to investors, while disclosure of the latter could put institutions that enable or engage in short selling at risk of market squeezes.
Where stated: EAC - FSA DP 17 Short Selling (PDF)
Disclosure Requirements for Retail-based Hedge Funds
Position: Hedge funds offered to retail investors should have minimum disclosure requirements relating to:
- Strategies used by the fund
- Risks inherent in these strategies at offering and on an on-going basis
- Fund performance, both on absolute basis and against appropriate benchmarks
- Historic fund performance by strategy
- Fund manager’s experience and background
- Regular audits by independent audit firms
- A description of valuation methods applied to specific securities
- A list of securities owned at regular intervals
Rationale: This information is needed to enable unsophisticated investors to determine whether the fund meets their risk/return requirements.
Where stated: USAC - SEC Hedge Funds 2003
Valuations
Position: Hedge fund investors need timely, relevant and standardized valuations, as well as information about the assumptions used to determine values for various hedge fund assets and liabilities.
Rationale: Valuations are a key component to enabling investors to properly assess the risks associated with a hedge fund. Valuations include a number of assumptions which could significantly affect the reported value. If hedge fund managers were to adopt and adhere to a code of conduct similar to the CFA Centre’s Asset Manager Code of Professional Conduct it would require them to provide investors with the information they need to effectively oversee hedge fund managers.
Where stated: CMPC - FSA DP 05/4 Hedge Funds (PDF); Asset Manager Code of Professional Conduct